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Central banks: focus is changing

A gaggle of central bank meetings this week largely met expectations. The RBI and BoE raised rates, the Fed hinted at more rate rises to come and the BoJ generally stuck to the status quo. But their concerns are starting to shift.

1. RBI and BoE rate rise decisions make explicit reference to inflation concerns, if for rather different reasons.

On Wednesday, the Reserve Bank of India (RBI) raised rates, in part because of concerns around inflation, exacerbated by raised agricultural minimum support prices and oil import costs. A depreciating rupee was also a concern. This was the second RBI rate rise in two months. On Thursday, the Bank of England (BoE) followed suit (and market expectations) by raising the base rate from 0.5% to 0.75%. Its Monetary Policy Committee (MPC) minutes, published immediately after the meeting, set out a conventional rationale: limited spare capacity in the economy (given low productivity and lower net migration) meant that any increase in demand would have inflationary implications. In other words, the focus was ongoing economic trends rather than any future shocks from Brexit or global trade disputes.

2. Fed prepares the ground well for further tightening but BoJ commitments don’t completely convince.

The Fed’s FOMC, which announced its decision on Wednesday, had a different focus. The Fed wanted to indicate that further policy tightening should be expected, given still very buoyant economic conditions: its post-meeting statement that used the word “strong” to describe economic activity, household spending and investment and jobs. Immediate inflation concerns were not too much to the fore, although there was a reminder that core inflation remained close to the target 2% rate. The Bank of Japan (BoJ), by contrast, wanted to reassure markets that ultra accommodative monetary policy would continue. It was partially successful in doing this. Its policy announcement on Tuesday talked of “continuous powerful monetary easing” and interest rates remaining low “for an extended period of time”. But some relatively minor changes in policy (e.g. a greater range for 10-year JGB rates around zero) were sufficient to unsettle markets, with Japanese 10-year yields having their biggest jump in two years.

3. Inflation is now on the radar for many central banks. So prepare for a more fluid policy environment ahead.

What does this all mean? Firstly, nearly 10 years after the eruption of the Global Financial Crisis, many central banks are not just focused on economic resuscitation. Future increases in inflation, perhaps exacerbated by tariff hikes, are on their radar too. Recent developments in China remind us that policy complexities in an uncertain environment can mount up quickly. Secondly, markets should get used to a rather more fluid policy environment and not assume (as they did with the BoJ announcement) that bank hand-holding will continue unadjusted forever. Times change.

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